October natural gas futures broke down into the heart of a major support band Thursday morning after the industry received word from the Energy Information Administration (EIA) that a hardy 65 Bcf was injected into underground storage for the week ending Aug. 28. The prompt-month contract dipped into the $2.50s in early trade Thursday and never recovered, closing at $2.508, down 20.7 cents from Wednesday’s regular session close.

Just prior to the 10:30 a.m. EDT release, it appeared that traders were bracing for a larger-than-expected injection as the October contract drifted to a new low of $2.600. Immediately after the large injection was confirmed the contract dropped even lower to trade at $2.552 and reached the day’s low of $2.500 at 11:20 a.m. The last time a front-month contract traded this low was more than seven years ago back in early March 2002, when April 2002 futures reached a low of $2.381.

News of the injection seemed to answer two looming questions: No, demand has not turned around yet, and, that even with more than 3.3 Tcf already in the ground, there is still space to store gas. The injection also confirmed the widely held belief that the country has an awful lot of gas right now.

“Can you imagine that we’d be talking about the $2.950 call being deep out of the money at this point?” a New York broker asked rhetorically. “Traders are really killing this thing. The Henry Hub is trading at $1.99. I really think that is all that needs to be said.”

“With cash trading sub-$2, futures don’t have too much of a leg to stand on,” said Ed Kennedy, a broker with Hencorp Becstone Futures in Miami. “People continue to ask why the screen is trading at such a premium to cash, but the weakness in cash is that they are filling storage very rapidly. We are at 3.3 Tcf and they can only put in 3.8 Tcf. There is nothing out there to spike demand or disrupt supply, so the question we have to answer is what is going to happen when storage is full?”

Kennedy said he believes the October contract is going to stay on the defensive while the winter months are still up in the air. “Forecasters are calling for some early cold, so the winter months are holding some premium,” he said. “If those forecasts reverse, the bottom is going to fall out of those months.”

The broker pointed out that Tropical Storm Erika could support prices depending on her path. “Right now they are saying Erika will head over South Florida as a tropical storm, so there is some question of whether she’ll get into the Gulf of Mexico. We don’t know the path yet and will likely have to wait until Tuesday. Nobody is making a big deal of the storm yet, but we’ll have to wait and see.”

As Thursday progressed Erika became more disorganized, leading AccuWeather.com meteorologist John Kocet to proclaim that the system was in “shambles” with the odds stacked against development. “Erika is having a real tough time of it and, at last report, was barely strong enough to be considered a tropical storm,” he said Thursday afternoon. “Everything is going against the system right now. There has been a lot of dry air in its way, there is wind shear to contend with and its circulation is interacting with the islands. The disturbance will track slowly toward the northwest through the weekend and no significant intensification is expected.”

Kennedy said the thing supply is going to have to worry about “is the fact that we are currently way below the price of production. While it varies on where you are producing, the cost of production on a marginal well is probably between $4.250 to $4.500, so losses are being taken,” he said. “The majors have to continue to produce, because if they back off and force prices higher, the White House is going to raise a stink. The independent producers are going to shut in because they can’t afford to lose the money. I am sure there are more than a few conversations occurring right now in board rooms about how long they can keep this up. At the end of the day, losses are losses. I really see this as the next shoe to drop.”

Heading into the storage report most industry observers were expecting a build somewhere in the 55 Bcf to 65 Bcf range. Bentek Energy’s flow model indicated an injection of 56 Bcf. The actual 65 Bcf injection came in just above the 64 Bcf five-year average build for the week, but was significantly smaller than last year’s 92 Bcf build.

As of Aug. 28 working gas in storage stood at 3,323 Bcf, according to EIA estimates. Stocks are now 489 Bcf higher than last year at this time and 501 Bcf above the five-year average of 2,822 Bcf. For the week the East region injected 52 Bcf and the Producing and West regions chipped in 7 Bcf and 6 Bcf, respectively. With nine weeks remaining in the injection season that ends with the report for the week ending Oct. 30, some estimates put final stocks upwards of 3.9 to 3.9 Tcf, either of which would be a record.

Some market watchers question why prices continue to fall, claiming that all the reports of mild weather and ample storage should have been fully discounted by now. “Those same factors have been the basic building blocks for lower prices over the last year to one degree or another,” said a New England-based consultant. “We continue to believe that high storage figures and the weak consumption that has caused them should already be discounted by existing prices. For almost 14 months now, those reasons have been used again and again to explain why prices have kept falling. At some point in time or at some price figure, they should stop being discounted by lower quotes.”

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